Petrobras: Buy or Sell?

By

Ben Levisohn

July 8, 2013 11:20 a.m. ET

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Two weeks ago, I argued in the pages of Barron's that Petrobras' (PBR) stock was likely to stay under pressure as long as the Brazil's real stayed weak. Since then, shares in the Brazilian oil giant have dropped 12%.

Petrobras must pay global prices in U.S. dollars for fuel imports but sell domestically in local currency at artificially low prices. In the last two years alone, after-tax losses in the company's domestic refining and marketing operations were $17.4 billion.

A series of government-sanctioned fuel-price increases starting last spring seemed to help. But the Brazilian real's slump, down about 12% against the dollar in just two months, has undone this. Meanwhile, stubborn inflation and recent protests mean the government likely won't help with further fuel increases, possibly until after October 2014 elections.

But with Petrobras down 37% during the past two months, is the selling overdone? EmergingMoney.com's Tim Seymourthinks it could be. He writes:

The call was also about a conduit for being short Brazil and when the big boys need to short Brazil Petrobras and Vale (VALE) are proven friends.

It's time to look to build a position in Petrobras, albeit carefully. Brazil is still in shaky territory but it is very oversold. Petrobras is starting to look interesting at these levels with oil prices holding, demand returning, and output at the company starting to improve.

Shares of Petrobras have dropped 0.4% to $12.20 today, while Vale has gained 0.6% to $12.70. The iShares MSCI Brazil Capped Index ETF (EWZ) has gained 0.6% to $41.70.

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